Supply Chain Management Introduction


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Supply Chain Management Introduction

  1. 1. Supply Chain Management Introduction 1
  2. 2. Outline What is supply chain management? Seven Eleven Japan A supply chain strategy framework Components of a SCM Major obstacles and common problems 2
  3. 3. Traditional View:Supply Chains in the Economy (1990, 1996) Freight Transportation $352, $455 B – Transportation manager in charge – Transportation software Inventory Expense $221, $311 B – Inventory manager in charge – Inventory software Transportation and inventory managers Administrative Expense $27, $31 B Logistics related activity 11%, 10.5% of GNP $898 B spent domestically for SC activities in 1998 3
  4. 4. Traditional View: Cost breakdown of a manufactured good Profit 10% Profit Supply Chain Cost Supply Chain Cost 20% Marketing Cost Marketing Cost 25% Manufacturing Manufacturing Cost 45% Cost 4
  5. 5. What can Supply Chain Management do? Estimated that the grocery industry could save $30 billion (10% of operating cost by using effective logistics and supply chain strategies – A typical box of cereal spends 104 days from factory to sale – A typical car spends 15 days from factory to dealership – Box of cereal more complex than a car? Laura Ashley turns its inventory 10 times a year, five times faster than 3 years ago National Semiconductor used air transportation and closed 6 warehouses, 34% increase in sales and 47% decrease in delivery lead time. 5
  6. 6. Magnitude of Supply Chain Management Compaq estimates it lost $0.5 billion to $1 billion in sales in 1995 because laptops were not available when and where needed When the 1 gig processor was introduced by AMD (Advanced Micro Devices), the price of the 800 meg processor dropped by 30% P&G (Proctor&Gamble) estimates it saved retail customers $65 million (in 18 months) by collaboration resulting in a better match of supply and demand 6
  7. 7. Importance of SCM understood by some AMR Research: – "The biggest issue enterprises face today is intelligent visibility of their supply chains-both upstream and down" Forrester Research: – "Companies need to sense and proactively respond to unanticipated variations in supply and demand by adopting emerging technologies such as intelligent agents. To boost their operational agility, firms need to transform their static supply chains into adaptive supply networks” Gartner Group: – “By 2004 90% of enterprises that fail to apply supply-chain management technology and processes to increase their agility will lose their status as preferred suppliers” 7
  8. 8. SCM Generated Value Minimizing supply chain costs while keeping a reasonable service level customer satisfaction/quality/on time delivery, etc. This is how SCM contributes to the bottom line SCM is not strictly a cost reduction paradigm! 8
  9. 9. A picture is better than 1000 words! How many words would be better than 3 pictures? - A supply chain consists of Supplier Manufacturer Distributor Retailer Customer Upstream Downstream - aims to Match Supply and Demand, profitably for products and services SUPPLY SIDE DEMAND SIDE - achieves The right Product + + + + + The right Price The right Store The right Quantity The right Customer The right Time = Higher Profits 9
  10. 10. Detergent supply chain: P&G or other Third Albertson’s Customer wants manufacturer party DC Supermarket detergent Chemical Plastic Tenneco manufacturer Producer Packaging (e.g. Oil Company) Chemical Paper Timber manufacturer Manufacturer Industry (e.g. Oil Company) 10
  11. 11. Flows in a Supply Chain Material Information Supplier Customer Funds The flows resemble a chain reaction. 11
  12. 12. SCM in a Supply Network Supply Chain Management (SCM) is concerned with the management and control of the flows of material, information, and finances in supply chains. Cash Products and Services Information THAILAND INDIA MEXICO TEXAS US N-Tier Suppliers Suppliers Logistics Distributors Retailers Supply Side OEM Demand Side Demand Supply The task of SCM is to design, plan, and execute the activities at the different stages so as to provide the desired levels of service to supply chain customers profitably 12
  13. 13. Importance of Supply Chain Management In 2000, the US companies spent $1 trillion (10% of GNP) on supply-related activities (movement, storage, and control of products across supply chains). Source: State of Logistics Report Frequent Supply Low order fill shortages Inefficient rates logistics High Tier 1 Manufacturer Distributor Retailer Customer stockouts Supplier Glitch-Wrong Material, Ineffective Machine is Down – High inventories High landed costs through the chain promotions to the shelf effect snowballs Eliminating inefficiencies in supply chains can save millions of $. 13
  14. 14. A Generic Supply Chain Sources: Regional Field Customers, plants Warehouses: Warehouses: demand vendors stocking stocking centers ports points points sinks Supply Inventory Purchase Inventory Transportation 14
  15. 15. Cycle View of Supply Chains Customer Customer Order Cycle Retailer Any cycle Replenishment Cycle 0. Customer arrival 1. Customer triggers an order Distributor 2. Supplier fulfils the order 3. Customer receives the order Manufacturing Cycle Manufacturer Procurement Cycle Supplier 15
  16. 16. Push vs Pull System What instigates the movement of the work in the system? In Push systems, work release is based on downstream demand forecasts – Keeps inventory to meet actual demand – Acts proactively » e.g. Making generic job application resumes today (e.g.: exempli gratia) In Pull systems, work release is based on actual demand or the actual status of the downstream customers – May cause long delivery lead times – Acts reactively » e.g. Making a specific resume for a company after talking to the recruiter 16
  17. 17. Push/Pull View of Supply Chains Procurement, Customer Order Manufacturing and Cycle Replenishment cycles PUSH PROCESSES PULL PROCESSES Customer Order Arrives Push-Pull boundary 17
  18. 18. Examples of Supply Chains Dell / Compaq Toyota / GM / Volkswagen, in the course notes McMaster Carr / W.W. Grainger, sell auto parts Amazon / Barnes and Noble Frozen food industry/Fast food industry/5 star restaurants Internet shopping: Webvan / Peapod 18
  19. 19. Seven Eleven Japan (SEJ) A Case Study 19
  20. 20. Factual Information on Seven Eleven Japan (SEJ) Largest convenience store in Japan with market value of $95 B. The third largest retail company in the world after Wal-Mart and Home Depot. Established in 1974. In 2000, total sales $18,000 M, profit $620 M. Average inventory turnover time 7-8.5 days. Stock value increased by 3000 times from 1974 to 2000. In 2000, there were 2000 stores in Japan, increasing by 400-500 per year. A SEJ store is about the half the size of a US 7-eleven store, that is about 110 m2. Sales: – 32.9% Processed food: drinks, noodles, bread and snacks – 31.6% Fast food: rice ball, box lunch and hamburgers – 12.0% Fresh food: diary products – 25.3% Non-food: magazines, ladies stockings and batteries. 20
  21. 21. More on SEJ More factual info: Average sales about twice of an average US store SKU’s offered in store: Over 3,000 (change by time of day, day of week, season) Virtually no storage space No food cooking at the stores Japanese Images of Seven Eleven: Convenient Cheerful and lively stores Many ready made dinner items I buy Famous for its great boxed lunch and dinner On weekends, when I was single, I went to buy lunch and dinner SC strategy: Micro matching of supply and demand (by location, time of day, day of week, season) 21
  22. 22. Seven Eleven - Number of Stores 1999: 8,027 6000 5000 4000 3000 Number of Stores 2000 1000 0 85 86 87 88 89 90 91 92 93 94 22
  23. 23. Seven Eleven - Net Sales (B Yen) Sales 1,963 B Yen in 2000 1400 1200 1000 800 Net Sales 600 400 200 0 85 86 87 88 89 90 91 92 93 94 23
  24. 24. Seven Eleven - Pre tax Profit (B Yen) 100 90 80 70 60 50 Profit 40 30 20 10 0 85 86 87 88 89 90 91 92 93 94 24
  25. 25. Seven Eleven - Inventory turnover (days) 14 12 10 8 Inventory 6 4 2 0 85 86 87 88 89 90 91 92 93 94 25
  26. 26. Information Strategy Quick access to up to date information (as opposed to data): In 1991, SEJ implemented Integrated Service Digital Network to link stores, headquarter, DCs and suppliers Customer checkout process – Clerk records the customer’s gender, (estimated) age and purchased items. These Point of Sales (POS) data are transmitted to database at the headquarters. Daily use of the data – Headquarters aggregate the data by region, products and time and pass to suppliers and stores by next morning. Store managers deduce trend information. Weekly use of the data – Monday morning, the CEO chairs a weekly strategy formulation meeting attended by 100 corporate managers. – Tuesday morning, strategies are communicated to Operation Field Counselors who arrive in Tokyo on Monday night. – Tuesday afternoon, regional elements (e.g. weather, sport events) are factored into the strategy. Tuesday nights, field counselors return back to their regions. Store hardware: Store computer, POS registers linked to store computer, Graphic Order Terminals, Scanner terminals for receiving 26
  27. 27. 27
  28. 28. Information Analysis of POS Data Sales analysis of product categories over time SKU analysis Analysis of waste or disposal Ten day (week) sales trend by SKU Sales trends for new product – In the early 1990s, half-prepared fresh noodle sales were going up, new fresh noodle products were developed Sales trend by time and day – Different sales patterns for different sizes of milk at different times of the day results in rearrangement of the milks in the fridge List of slow moving items – About half of 3000 SKUs are replaced by new ones every year 28
  29. 29. Facilities Strategy Limited storage space at stores – Frequent and small deliveries to stores Deliveries arrive from over 200 plants. Products are grouped by the cooling needs – Such product groups are cross-docked at distribution centers (DC). Food DCs store no inventory – Combined delivery system: frozen foods, chilled foods, room temperature and hot foods. – A single truck brings a group of products and visits several stores within a geographical region – Aggregation: No supplier (not even coke!) delivers direct The number of truck deliveries reduced from 70/day in 1974 to 10/day in 2000. Still, at least 3 fresh food deliveries per day. Have many outlets, at convenient locations, close to where customers can walk Focus on some territories, not all: When they locate in a place they blanket the area with stores; stores open in clusters with corresponding DC’s. 844 stores in the Tokyo region; Seven Eleven has 5,523 stores in 25 out of 47 prefectures. No stores in Kobe. 29
  30. 30. The Present and the Future Is food preparation a good idea at 7-eleven locations? – e.g. Compare microwave heating vs. salad preparation. Why SEJ does not allow direct delivery from suppliers to retailers? Point out which of the following strategies can also be used in US – Information strategy – Facilities strategy Discuss the differences between the Japanese and US consumers with regard to – Frequency and amount of grocery purchase – Use of credit cards vs. cash for purchase 7-eleven growing rapidly in the US so it aims to be a web depot in both the US and Japan. Does this make sense from a supply chain perspective? – Cost vs. Responsiveness – Business strategy 30
  31. 31. SCM Strategy 31
  32. 32. Mission-Strategy-Tactics-Decisions Mission – The reason for existence of an organization Mission Statement – A clear statement of purpose Strategy – A plan for achieving organizational goals Tactics – The actions taken to accomplish strategies Operational decisions – Day to day decisions to support tactics 32
  33. 33. Life Strategy for Ted Ted is an undergrad. He would like to have a career in business, have a good job, and earn enough income to live comfortably Mission: Live a good life Goal: Successful career, good income Strategy: Obtain a master’s degree Tactics: Select a college and a concentration Operations: Register, buy books, take courses, study, graduate, get job 33
  34. 34. Linking SC and Business Strategy Competitive (Business) Strategy New Product Marketing Strategy Strategy Supply Chain Strategy New Marketing Product and Operations Distribution Service Development Sales Finance, Accounting, Information Technology, Human Resources 34
  35. 35. Strategies Product development strategy relates to Set of products/services and technologies for future operations – e.g. Be the technology leader – e.g. Offer many products Marketing and sales strategy relates to positioning, pricing and promotion of products/services – e.g. Never offer more than 40% discount – e.g EDLP = every day low price – e.g. Demand smoothing via coupons Supply chain management strategy relates to procurement, transportation, storage and delivery – e.g. Never use more than 1 supplier for every input – e.g. Never expedite orders just because they are late 35
  36. 36. Achieving Strategic Fit: Consistent SCM and Competitive strategies Fit SC to the customer Understanding the Customer – Range of demand Implied – Production lot size (Demand) – Response time – Service level Uncertainty – Product variety for SC – Price sensitivity Implied – Innovation trouble for SC 36
  37. 37. Contributors to Implied Demand Uncertainty Detergent High Fashion Commodities Customized products Long lead time steel Emergency steel Customer Need Price Responsiveness Low Implied Demand Uncertainty High Small production lot sizes, short lead times, product variety, distribution channel variety, high rate of innovation and high customer service levels all increase the Implied Demand Uncertainty 37
  38. 38. Understanding the Supply Chain: Cost-Responsiveness Tradeoff Responsiveness (in time, high service and variety) High Efficiency frontier Fix responsiveness Inefficient Impossible Inefficiency Region Low Cost in $ High Low Why decreasing slope for the efficiency frontier? 38
  39. 39. Achieving Strategic Fit Responsive (high cost) supply chain f Responsivenes n e o Fi t spectrum Zo egic t ra St Efficient (low cost) supply chain Certain Implied Uncertain demand uncertainty demand spectrum 39
  40. 40. Loosing the strategic fit: Webvan Webvan started a merger with HomeGrocer in Sept 2000 and completed in May 2001. Declared bankruptcy in July 2001. Why? – “Webvan was so behemoth that could deliver anything to anyone anywhere that it lost sight of a more mundane task: pleasing grocery customers day after day”. – Short to midterm cash mismanagement. Venture capital of $1.2 B run out. – Merger costs: duplicated work force, integration of technology, realignment of facilities. Peapod has the same business model but more focused in terms of service and locations. It actually survives with its parent company Royal Ahold’s (Dutch Retailer) cash. 40
  41. 41. Big retailers’ Strategy Wal-Mart: Efficiency Target: More quality and service Carrefour: International, ambiance K-Mart: Confused. – Squeezed between Target and Wal-Mart – Reliance on coupon sales – Do coupons stabilize or destabilize a Supply chain? 41
  42. 42. Other Factors Multiple products. Multiple customers for a given product – Separate supply chains or Tailored supply chains » e.g. Compaq – Product and/or customer classes » e.g. UTD library loans books for 6 months (2 weeks) to faculty (students) Product life cycle (shortening) – SCM strategy moves toward efficient chain and low implied uncertainty as products age » e.g. Air travel is becoming more efficient – Macroeconomic factors for visibility » Forecasting Home Depot sales from S&P 500 price index. Competitors: more, faster and global » E.g. Southwest airlines lead the drive for efficiency 42
  43. 43. Integration Integration is the central theme in SCM Building synergies by integrating business functions, departments and companies 43
  44. 44. Strategic Scope Suppliers Manufacturer Distributor Retailer Customer Competitive Strategy Product Dev. Strategy Supply Chain Strategy Marketing Strategy 44
  45. 45. Supply Chain Drivers and Obstacles 45
  46. 46. Drivers of Supply Chain Performance How to achieve Efficiency Responsiveness Supply chain structure Inventory Transportation Facilities Information Drivers 46
  47. 47. 1. Inventory Convenience: Cycle inventory – No customer buys eggs one by one Unstable demand: Seasonal inventory – Bathing suits Randomness: Safety inventory – Compaq’s loss in 95 Pipeline inventory – Work in process or transit 47
  48. 48. Little’s law For Long run averages = Expected values I=R.T I=Pipeline inventory; R=output per time=throughput; T=delay time=flow time 10/minute Spend 1 minute Flow time? Thruput? Inventory? 48
  49. 49. 2. Transportation Air Truck Rail Ship Pipeline Electronic 49
  50. 50. 3. Facilities Production – Flexible vs. Dedicated – Flexibility costs » Remember BMW: “a sports car disguised as a sedan” Inventory-like operations: Receiving, Prepackaging, Storing, Picking, Packaging, Sorting, Accumulating, Shipping – Job Lot Storage: Need more space. Reticle storage in fabs. – Crossdocking: Wal-Mart 50
  51. 51. Information Information drives the decisions: – Good information means good decisions IT helps: MRP, ERP, SAP, EDI Relevant information? How to use information? 51
  52. 52. Considerations for Supply Chain Drivers Driver Efficiency Responsiveness Inventory Cost of holding Availability Transportation Consolidation Speed Facilities Consolidation / Proximity / Dedicated Flexibility Information Low cost/slow/no High cost/ duplication streamlined/reliable 52
  53. 53. Major Obstacles to Achieving Fit SC is big: – Variety of products/services – Spoiled customer – Multiple owners (Procurement, Production, Inventory, Marketing) / multiple objectives – Globalization Local optimization and lack of global fit 53
  54. 54. Dealing with Multiple Owners / Local Optimization Information Coordination – Information sharing / Shyness / Legal and ethical issues Contractual Coordination – Mechanisms to align local objectives with global ones 54
  55. 55. Major obstacles to achieving fit Instability and Randomness: – Increasing product variety – Shrinking product life cycles – Customer fragmentation: Push for customization – Fragmentation of Supply Chain ownership: Globalization Increasing implied uncertainty 55
  56. 56. Common problems Lack of SCM metrics: How to measure responsiveness? » How to measure efficiency, costs, etc? Poor IT design » Unreliable, duplicate data Poor delivery status information » Not knowing the order status Ignoring uncertainties Internal customer discrimination » Giving lower priority to internal customers than external customers Poor integration Elusive inventory costs SC-insensitive product design 56
  57. 57. Summary Supply Chain Introduction Competitiveness / Business strategy / SCM stratyegy Components – Inventory, Transportation, Facilities, Information Challenges 57